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Recently dubbed ‘the backbone of the European economy’, sound accounting practices could help SMEs in their quest for finance and, ultimately, secure their survival

This article was first published in the March 2013 International edition of Accounting and Business magazine.

Small and medium-sized enterprises (SMEs) in the European Union (EU) complain they cannot get finance from banks, or not on reasonable terms. Banks counter that there is just not that much demand. Politicians have responded with schemes to improve the flow of finance to SMEs. In September last year, for example, the UK government’s business secretary Vince Cable announced a plan to set up a state-backed British Business Bank.

Against this background, accountants play increasingly vital roles as SME directors, employees or advisers. ACCA has long argued that tough credit conditions highlight the value of good accounting practice
and standards.

So why all the noise? Just this: SMEs comprise 99% of all companies across the EU; 85% of EU employment growth between 2002 and 2010 was down to SMEs; and the growth rate of SME employment was around twice that of large companies, according to the Netherlands-based EIM Business and Policy Research. These trends have reversed across the EU as a whole since 2008.

‘But there’s a diverse experience around Europe,’ says Manos Schizas, senior economic analyst at ACCA. ‘Credit is tighter throughout Europe than we would expect given the growth figures, and that’s largely the result of the banks’ recapitalisation efforts; but there are parts of Europe – I’m thinking Austria or Germany and some of central Europe – where the supply of credit is tighter than before but nothing like as constrained as in the UK or Ireland.’

That said, concern is widespread: ‘The role of SMEs as the engine of the European economy is under threat,’ warned the authors of a September 2012 report for the European Parliament’s Committee on Employment and Social Affairs.

‘Finance is still one of the main obstacles for small businesses,’ agrees Patrick Gibbels, secretary general of the Brussels-based European Small Business Alliance (ESBA). ‘Although the EU is making efforts towards creating suitable financing schemes, often the funds do not reach their intended beneficiaries. There should be a much better communication strategy to make SMEs aware of the possibilities.’

He adds: ‘The European Commission has recently been focusing its efforts more towards equity tools, such as venture capital. Whilst important, ESBA warns against an over-reliance on these funds as they only benefit highly innovative SMEs, which of course make up only a very small percentage of all EU small businesses.’

Micro-credit scheme

Austria was one case study in the EP report. Austria’s Wirtschaftsservice (AWS) – a public agency promoting the development of innovative companies and commercialisation of new technologies – channelled early government help for SMEs. This included: boosting credits by €400m to €600m; a new micro-credit facility; extensions of guarantees; and the establishment of an SME fund (Mittelstandsfonds).

So what happened? The number of cases subsidised by the AWS rose some 15%, while overall lending decreased by about 1%, as did average project value as SME needs for working capital during the 2008/09 crisis partly replaced demand for support for capital investment. Seeing this, Austria changed credit subsidy rules to allow funding of SME operational activities in 2009 and 2010.

The EU report noted that Austria’s micro-credit scheme was well received by SMEs after initial administrative issues were sorted out and banks made staff aware of its availability.

State guarantees for loans to SMEs were extended and, as banks began to increase the collateral needed for credit, the guarantees helped to reduce the collateral needed.

Intriguingly, given that banks in other countries also report demand for loans lower than media reports suggest, the Austrian stimulus package was not fully used up.

The British experience is similar. Bank of England figures in October 2012 showed the stock of lending to businesses of all kinds by UK-resident banks and building societies fell by more than £2bn (€2.5bn) in the three months to August 2012.

Net lending (gross lending less repayments) by all monetary financial institutions had been negative since 2011 Q2 as debt was repaid faster than scheduled.

‘Business owners in the UK are not investing massively and calling on new debt capital,’ says David Ascott, corporate finance partner and head of the funding solutions team at accountants Grant Thornton, London. ‘That said, the bank debt market is difficult and there are a limited number of places to raise capital when [the UK’s] Big Four banks have been focusing on larger, safer opportunities for themselves rather than smaller and more difficult ones.’

‘Some SMEs do not seek finance because they are discouraged,’ adds Schizas at ACCA. ‘They just don’t think they’ll get any and, for the most part, they are right. Discouraged demand removes the worst credit risks first. So it’s cost-effective for banks to discourage demand.’

It is also clear that businesses have tried to operate without needing so much liquidity. ‘If you look at indicators such as utilisation of overdrafts, it’s historically low precisely because businesses don’t want to have anything to do with that kind of liquidity,’ Schizas says.

Tighter credit criteria are a fact of life, he acknowledges. ‘But banks are not saying they will just not lend. They want more reassurance and information,’ he says. ‘Few people realise just how poor SMEs generally are at producing actionable, reliable information about themselves that banks or other funding providers need.’

He elaborated: ‘Rigorous independent research in the UK shows businesses that produce regular management reports and have financially trained people in charge of finances are more likely to get funding. Only 12% of UK SMEs actually have both of these in place.’

Broad focus

Stephanie Hyde, a partner at PwC, and PwC board member for the UK regions, says: ‘We would advise businesses not to be too narrow in their focus when seeking additional funding. Think about where you might get your funding from. Have you thought about alternatives to bank lending, such as venture capital, private equity, commercial finance or business angels? Have you investigated the various government initiatives, such as the support fund for companies looking to export? Also, be prepared to be flexible in terms of how much you are seeking, but also on what timescale. Some lenders may be more open to a plan that sees you receive a small portion of your lending request now and more in the future for example.’

Hyde adds: ‘It goes without saying that companies looking to access finance should be sure that they have their accounts in good order and have realistic and honest figures around future growth and cashflow. But if companies really want to have the best chance, we would advise them to have a well thought out business plan and strategy with them to show the lenders they really know their business and where they want to take it.’

It is important for all parties in the debate on SME financing to be able to agree on facts, Schizas says. The UK’s Treasury (finance ministry) and Bank of England (central bank) are prepared to spend billions financing banks to lend to business through a Funding for Lending scheme, but what if the key issue really is whether businesses can provide high-quality information?

Funding for Lending in the UK has had no effect on lending to business, but has instead had the unintended effect of bolstering the property market, Schizas says.

‘If it turns out that the issue is not funding for banks, but some kind of support for business, then the Treasury and Bank of England should be prepared to put some money into that, though not billions,’ Schizas suggests.

ACCA research has found that the most reliable influence on whether a business can raise finance is the state of its cashflow. ‘It isn’t something you can fix the moment you need funding,’ says Schizas. ‘It’s something that comes out of day-to-day management of the business.’

In his view, by the time a business decides to seek funding, its chances of securing finance depend almost entirely on the nature of the business and how it has been run.


‘SMEs should recognise that banks face challenges too,’ says Grant Thornton’s Ascott. ‘Businesses should research a broader group of funders than in the old days. A range of new debt funds and providers has arisen.’ Robust business plans that have been thoroughly stress-tested are a minimum requirement for seeking finance, he says.

‘SMEs also need ensure that what they are asking for is correctly targeted at the capital providers they are talking to. If it’s an equity capital requirement because there’s no cashflow and it’s all goodwill and no security, then there’s no point speaking to a high-street bank about it,’ Ascott advises.

A final observation is that EU countries with more decentralised banking have tended to do better in supplying credit to SMEs. ‘In decentralised systems, SMEs did not become as dependent on credit in the boom times,’ says Schizas. ‘These banks ration their capital to a level of risk that they are comfortable with and will not lend beyond that.’

In more centralised systems such as the UK, banks are more comfortable modelling the market and generally proceed on the presumption that they can lend, but at a price, he adds.

‘In boom times places like the UK saw the supply of credit to small business go up substantially more than in Austria and Germany, and more marginal borrowers were brought into the system at higher interest rates.’ Those marginal borrowers have been dropped overnight. ‘Which is why you see this big cliff in credit supply in the UK,’ Schizas says.


SMEs with between 10 and 249 employees and turnovers from €2m to €50m represent 99% of the European Union’s stock of companies and employ 70% of its workers, some 75 million people. These enterprises account for 58% of total turnover in the EU. A recent European Parliament report called them ‘the backbone of the European economy’. The report urged the EU to help SMEs to develop efficient internationalisation strategies to seize opportunities in the global market.


Refused loans and overdrafts by banks, some start-up SMEs now solicit early stage finance though ‘crowdfunding’ mediated by online services such as,, and Crowdfunding is all the rage and making headlines daily.

US-based Kickstarter, through which entrepreneurs invite donations and pre-sales of goods and services rather than offering equity like Seedrs, has now expanded into Britain. While these new channels have been generally welcomed, some accountants have pointed out that directors have a responsibility to shareholders and should know more about investors providing capital through this route – especially when minimum investments via crowdfunding can be very low: £10 in the case of Seedrs.

Some business angel organisations warn crowdfunded businesses that later approached angels for next-stage capital might find that a complex share register would deter angel investment.

Robert Stokes, journalist


Last updated: 4 Apr 2014